The deals created by 1031 exchanges help fuel activity by keeping mortgage brokers, lenders, and banks busy with more deals and with origination fees. They keep appraisers, surveyors, phase one companies, inspection companies, and many others busy as well. Ultimately, the decrease in activity is going to influence cap rates, rents, tenant expansion, and that trickle-down effect will continue.
These 1031 exchanges create traction for a variety of sectors. The repeal could very well result in banks going underwater on a lot of commercial loans due to decreased values, possibly pulling the economy into another recession. It may also hit the government hard due to real estate tax values ceasing to increase.
The main push by legislators and the current administration is that the elimination of Section 1031 will help to offset the additional tax cuts being proposed. President Trump is pushing for a proposed corporate tax rate cut from 35 percent to 15 percent, as well as cutting individual tax rates in hopes of stimulating the economy.
Considering President Trump’s background in commercial real estate, you would think he would see the value and lean towards keeping Section 1031. In fact, he himself has used Section 1031 exchange laws as a tool to roll capital gains into two high-rise towers. It’s a powerful medium for generating tremendous economic activity, and simply put, without Section 1031, the economy is staring down devastating effects.